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October 19, 2006

The Nasdaq-ECN War Is Off for Now

By Gregory Bresiger

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  • The Nasdaq-ECN War Is Off for Now

ECN officials, who claim that Nasdaq was trying to ruin them with a new pricing model and the elimination of order delivery, have found short-term solutions to their problems. They are hoping the National Stock Exchange's new Blade trading platform or an upgraded Alternative Display Facility (ADF) will be better substitutes than Nasdaq's platform.

"We'll see how the ADF and Blade works and decide which one to use. Likely we'll be using both," an official of one of the ECNs told Traders Magazine.

Two of the biggest ECNs, Bloomberg Tradebook and Direct Edge, continue to use Nasdaq, according to trading industry sources. They will use Nasdaq because the new pricing model and order delivery controversies are academic since Nasdaq decided to delay the system platform upgrade (See story, Nasdaq Gets Platform Delay').

The controversy began earlier this year when ECNs had implored the regulators to delay Nasdaq's new pricing schedule and platform upgrade. That would have forced them to accept automatic executions, which would have resulted in duplicate executions. Part of the problem with the ECNs is Nasdaq originally refused to delay the merger of its three trading platforms. The ECNs couldn't keep up with its efforts to improve the trading platform, Nasdaq officials complained.

So for now, the solution is for the ECNs to use NASD's ADF and NSX's Blade, which was due to begin operations as Traders Magazine went to press. But there are still questions about both alternative systems.

"We've been promised that the ADF will be upgraded," said one ECN executive who didn't want to be quoted by name. He said that the ADF doesn't offer trading in listed securities or permit quoting in subpennies, but he expects "those deficiencies" will be corrected by the NASD.

"Blade doesn't solve the problem entirely. But it will help," another ECN official said.

The source predicted that all the ECNs fighting with Nasdaq-including Bloomberg Tradebook and Citigroup Global Markets and its affiliate OnTrade-will end up using the Blade platform. However, the ECN executive said, for the Blade platform to succeed, quote attribution would be a key issue for firms with substantial institutional flow like Bloomberg and Citigroup.

That means, trading officials say, when an ECN puts a quote out to an exchange that it is not identified, so it is not recognized as a good quote. An NSX official said that Blade will solve that problem.

"What we've done to address this issue," said David Colker, CEO of NSX, "is to create a proprietary data base available to the vendors so that anyone who wants to, can see details of who is quoting and can see our depth of book. This will show specifically who is quoting on our exchange."

One ECN official said that his firm is considering using Blade, but isn't certain if it will. "We are reviewing their proprietary system, looking at the cost-benefit analysis," he said.